Understanding Inflation in Malawi

A Quantitative Investigation

This paper focuses on the role of the pass-through of the exchange rate and policydeterminants
in driving inflation. Using linear and nonlinear frameworks, the paper finds:
(i) after the switch to a floating exchange rate regime in 2012, nonfood prices not only
directly influence headline inflation, but also have an significant...
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Publication date:March 2017ISBN 9781475585988
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This paper focuses on the role of the pass-through of the exchange rate and policydeterminants
in driving inflation. Using linear and nonlinear frameworks, the paper finds:
(i) after the switch to a floating exchange rate regime in 2012, nonfood prices not only
directly influence headline inflation, but also have an significant impact on food inflation
via second round effects; (ii) the pass-through of the exchange rate to headline inflation has
jumped from zero to 11 percent under the floating regime, after controlling for other
factors; (iii) the improved significance of T-bill rates in shaping inflation flags its
importance in Malawi’s monetary framework although the monetary transmission
mechanism needs further strengthening; (iv) the increased impact of broad money
underscores the necessity for fiscal discipline and central bank independence.